Russia getting used to life under sanctions

While Russian leaders see Western sanctions as a way of jump-starting domestic industries, economists warn of a lack of accessible credit and fear an impending recession.

In response to the
sanctions imposed by the United States and the European Union on Russia over
its actions in Ukraine, for the first time in Russia’s post-Soviet history, the
Russian government initiated its own restrictive measures. While the sanctions
that Western countries implemented were aimed at limiting exports, Russia’s aim
was to restrict imports.

On Aug. 7 the Kremlin introduced a complete ban on
beef, pork, poultry, fish and shellfish, milk and dairy products, nuts and
fruits and vegetables from Australia, Canada, the E.U., the U.S. and Norway for
one year. The list was later amended to allow lactose-free milk, young salmon,
trout, seed potatoes, onions, hybrid sweet corn and nutritional supplements.

According to Ruslan Grinberg, the director of the
Institute for International Economic and Political Studies at the Russian
Academy of Sciences, Russia did not select these items at random.

“In the European Union, agriculture is a subsidized
segment of the economy, which usually develops thanks to active support from the
government,” said Grinberg. “Thus, the Russian government is trying to
influence European politics from within.”

According to this theory, Europe’s supply of food
products will increase and cause deflation, therefore damaging the European
economy.

The consequences of these retaliatory sanctions,
however, have the potential to be much more serious for Russia’s economy.

According to official records, Russia imports about
$40 billion worth of agricultural products annually. Approximately 20 percent
of all imports and 10 percent of all goods on the market have been affected by
the sanctions.

During a session of Russia’s State Council on Sept.
18, President Vladimir Putin suggested that the sanctions could be turned to
Russia’s advantage by increasing the competitiveness of the Russian economy,
focusing on gross domestic and gross national product, consumption, savings,
and capital formation, or the real sector.

“In the next one-and-a-half to two years, it is
necessary to take a real leap in the improvement of the real sector’s
competitiveness,” said Putin, adding that in the past, such actions would have
taken years to do.

According to Putin, the efforts of all federal and
regional government departments must be oriented toward developing the real
sector. In particular, progess must be made on improving access to credit and
creating new competitive conditions for financing business expansion.

Explained Putin: “We need to use one of the
country’s most important competitive edges: the capacious domestic market.” It
needs to be filled with quality goods made by the real sector, he said, while
maintaining the economy’s stability and equilibrium.

Mission impossible?

Experts reacted to the
president’s words with caution, warning that there were many problems that must
be overcome before Russian companies could produce, as Putin said, “a
sufficient quantity of production that will not be inferior to foreign
production in price and quality.”

One problem is having the money to fuel
development. “Talk of accessible credit has been around in Russia since the
fall of the Soviet Union, but enterprises have still not received it,” says
Anton Soroko, an analyst at Finam Investment Holding.

Restrictions on foreign sources of credit as a
result of economic sanctions will also not help improve the situation.

Vladimir Osakovsky, chief economist on Russia and
the Commonwealth of Independent States at the Bank of America Merrill Lynch is
also doubtful about the ability of the Russian economy to show substantial
growth in the near future.

“We expect that the macroeconomic situation in
Russia will worsen as a result of the accelerating inflation caused by the
restrictions on food imports, the fall of consumption and the volume of
investment, as well as the reduction of exports,” Osakovsky said in the
business publication RBC Daily.

The sanctions that Russia has implemented have
already led to an increase in inflation within the country. According to a new
forecast by Osakovsky, in the second half of 2014 and the first half of 2015 Russia
will sink into a recession, which will be followed by a recovery generated
mainly by the base effect.

Alexei Kozlov, chief analyst at the UFS investment
company, has a different opinion, however. “The proposal to accelerate the
development of the Russian economy that we heard during the State Council
session is completely realistic,” he said.

According to Koslov, such high goals are necessary
to enact radical changes in the way the Russian economy functions.

“On the whole, Russia has been voicing its aim to
reduce its raw material dependence for a long time,” said Kozlov. “In light of
the recent events, this goal has been expanded and is now attainable.”

The market’s reaction

Indeed, despite the
sanctions, Russian industrial enterprises are showing positive economic signs.
According to data collected in September by the Gaidar Institute of Economic
Policy, short-term investment expectations in the industrial sector are still
high, on par with those of 2012. In addition, the institute’s “industrial optimism
index” came close to the three-year maximum in September 2014.

Between January and July 2014, the production of
consumer goods grew by 3.3 percent, passenger cars by 5.7 percent and cargo
vehicles by 12.7 percent. Textile and clothing manufacturing increased by 6
percent, and the production of electronic telecommunication components by 17.6
percent.

In the first half of the year, the growth of
industrial production was 1.5 percent compared with the same period in 2013,
while G.D.P. grew by 0.8 percent. According to a study carried out by the
Higher School of Economics, the last time this happened was in 2010-2011.
However, it is important to note that today, this growth is entirely the result
of orders from the state.

At the moment, according to experts, only a few
industrial sectors are experiencing growth. One is the production of vessels,
aircraft, spacecraft and other forms of transport. This segment also includes the
production of railroad cars, airplanes, helicopters and submarines — a
substantial amount of which are purchased by the government and by state
companies.

Production in this sector has been growing since
the middle of 2013, and in 2014 it increased dramatically. While at the end of
2013, this subsector’s contribution was only 0.1 percent of the growth of
industrial production (out of 0.4 percent growth), in the period between
January and August 2014, it was already 0.7 percent out of 1.3 percent.

Russia’s metallurgical industry has also
experienced growth. The sector has received an additional share of the domestic
market because of the ban on supplies from Ukraine. But the demand for
increased metallurgical production is also related to construction on the South
Stream and Power of Siberia energy pipelines.